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USD tumbles against peers, GBP edges higher on Brexit hope

  • US dollar (USD) exchange rates plunge on the back of improved mood in foreign exchange (FX) markets
  • US dollar to Canadian dollar (USD/CAD) exchange rate trading on the back foot but Bank of Canada (BoC) meeting in focus
  • Brexit uncertainty continues to expose pound Sterling (GBP) to downside risks
  • Euro (EUR) rangebound ahead of Thursday’s EU Summit and European Central Bank (ECB) monetary policy statement

Currencies remain relatively rangebound in mid-week trade with volatility being led by pound Sterling (GBP), which continues to oscillate as investors interpret the state of play of Brexit trade negotiations.

However, the US dollar (USD), which had benefited from risk-off trade earlier this week retreated against its G10 rivals during the Asian session and remains depressed in London trading hours.

Steven Mnuchin’s USD 916BN COVID-19 stimulus proposal is being cited as the reason for declines, with House Speaker Nancy Pelosi and Senate Democratic leader Chuck Schumer stating that the plan is progress.

The move boosted risk sentiment and saw the US Dollar Index (DXY) slip into the red to 90.76 at the time of writing – slightly above December lows.

Yet, despite the improved music mood in foreign exchange (FX) markets, the US dollar to Japanese yen (USD/JPY) exchange rate has failed to capitalise on the overnight move and continues to struggle at the JPY 104.100 level.

At the time of writing, USD/JPY is trading sideways at JPY 104.105, and the broad-based selling bias around the greenback could limit the potential for upside in the currency pair.

United States Dollar (USD)

US dollar under renewed pressure in forex markets

A stimulus breakthrough between Congress and the White House could further weaken the US dollar (USD), especially against riskier assets such as the Canadian dollar (CAD), Australian dollar (AUD) and British pound (GBP).

As of 12:30 GMT, the US dollar to Canadian dollar (USD/CAD) exchange rate is trading 0.3% lower at CAD 1.2775 – marginally higher than multi-year lows of CAD 1.2767.

While the Bank of Canada’s (BoC) interest rate decision could put a cap on the “Loonie’s” gains, the reality is that the US dollar to Canadian dollar (USD/CAD) is trading more than 12% lower than it did in March, which was when the majority of the world imposed restrictions to halt the Coronavirus pandemic.

Although the BoC has expressed concern about growth in the country due to the reintroduction of COVID-19 restrictions and lockdowns, Canada continues to produce positive economic data. As a result, many economists and analysts expect the BoC will leave interest rates and monetary policy unchanged.

Canada is also expected to receive its first vaccine shipment this month, which is supportive of the economy’s recovery outlook.

The UK was the first country in the world to deploy a vaccination programme, which should’ve drove the British pound (GBP) higher against a plethora of major currencies. However, Brexit uncertainty continues to weigh on pound Sterling (GBP).

Pound Sterling remains vulnerable to Brexit developments

Pound Sterling (GBP) is advancing against the euro (EUR) and the US dollar (USD) on Wednesday, supported by signs of progress in UK-EU trade talks; however, it is evident that investors remain cautiously optimistic about a Brexit deal being reached.

UK Prime Minister Boris Johnson is expected to hold a meeting with European Commission President Ursula von der Leyen later today to resolve the logjam in negotiations and secure a future accord with the EU.

However, the highly anticipated ‘breakthrough moment’ on a UK-EU free trade agreement remains elusive, and with Brexit trade talks entering the 11th hour for the umpteenth time, further volatility in the Pound (GBP) is likely.

At the time of writing, pound Sterling (GBP) is outperforming its US counterpart, with the British pound to US dollar (GBP/USD) currency pair trading 0.6% higher at USD 1.3456.

Pound Sterling (GBP) has also extended overnight gains against the euro (EUR) as the British pound to euro (GBP/EUR) exchange rate is trading 0.5% higher as of 12:30 GMT, at EUR 1.1096.

However, depending on the outcome between the Johnson-von der Leyen meeting, GBP/USD and GBP/EUR could have very different pricings next week.

Both London and Brussels have said that the meeting is not to call or halt a Brexit deal but see whether the two can make progress on a political level to help push negotiations between Michel Barnier and David Frost along.

Given that it remains possible that Brexit trade talks could continue to run for days yet despite the end of the transition period deadline looming, further press briefings, updates and newswire reports could inject a fresh bout of volatility into GBP exchange rates.

For our readers who are monitoring GBP exchange rates, GBP/USD and GBP/EUR may not stabilise for another three weeks, given that the UK and the European Union seem keen to negotiate a Brexit deal until the final minute.

That being said, the euro (EUR) could be subject to some selling pressure following Thursday’s EU Summit and the European Central Bank’s (ECB) monetary policy statement.

EU Summit - European Parliament

Focus remains on upcoming EU Summit and ECB meeting

French President Emmanuel Macron and German Chancellor Angela Merkel have agreed to keep Brexit off the agenda at tomorrow’s EU Summit. Though, that’s not to say that EU leaders don’t have enough political drama to contend with tomorrow.

The EU’s ongoing stand-off with Hungary and Poland could trigger significant headwinds for the single currency if the two European Economic Area (EEA) countries continue to block the EUR 1.82TN seven-year budget and EUR 750BN coronavirus aid package.

Both countries have been given 24 hours to drop their veto or miss out on billions in fiscal aid; however, Hungary and Poland stand a good chance of getting their way, which could trigger a political crisis in the EU.

The ECB is also holding its policy meeting on ‘Super Thursday’, and for weeks, policymakers have made it clear that the central bank will ramp up policy action to boost the Eurozone economy, which could weigh on the euro (EUR).

However, as the euro (EUR) has become increasingly driven by the US dollar (USD) outlook rather than ECB monetary policy, so it’s also likely that any additional easing will have a limited impact on the single currency.

At the time of writing, the euro to US dollar (EUR/USD) exchange rate is trading flat at USD 1.2114. If EUR/USD manages to stay above the USD 1.2090 support level, the currency pair may stand a good chance of gaining upward momentum.

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